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Bank of America, Citibank, Goldman Sachs, and HSBC are among the
banks operating in the US calling for a safe harbor to protect them
against the liability of disclosing climate risk.
The banks are members of a nonpartisan policy
and advocacy group, the Bank Policy Institute (BPI), that also
spoke out against the idea of having its members investigated by
government agencies or having audits of climate disclosures because
they are based on a "nascent stage of verification and data
inconsistencies."
The BPI, which represents universal, regional, and major foreign
banks operating in the US, wrote largely in support of the
disclosure of risks caused by direct climate impacts or indirect
climate policies in a 9 June comment letter to the US Securities
and Exchange Commission (SEC).
However, it warned the SEC against prescribing a set of rules
for disclosing climate risk, "given the dynamic and evolving nature
of climate disclosure in all sectors" that would open companies to
litigation.
The SEC asked for public comment in
late March on how it can improve the current process of reporting
climate risks by public holding companies, and it is looking to
propose a rule by October. However, sources familiar with the
rulemaking process say the SEC may only issue an advanced notice to
get feedback on what its rulemaking could look like.
The agency deemed climate impacts to be a material risk a decade
earlier, but has just started to scrutinize the reports, given the
complaints it has received over inconsistent disclosure.
The SEC agrees that investors need climate risk reports that are
consistent, comparable, and reliable so they can use them to price
risk and allocate capital, and cast a proxy vote.
Hundreds of comments
In a 23 June speech during London Climate
Action Week, SEC Chairman Gary Gensler, who until now has stayed
largely silent about the upcoming climate disclosure risk rule,
noted the 400 unique responses that the
agency has received in response to its call for comment.
"I'm really struck by the call for enhanced disclosures," said
Gensler.
He added that he has asked SEC staff to consider "potential
requirements for companies that have made forward-looking climate
commitments, or that have significant operations in jurisdictions
with national requirements to achieve specific, climate-related
targets," but stopped short of indicating his position on a need
for a safe harbor.
As part of the upcoming rulemaking, Gensler said he also has
asked the agency's staff to look at the range of metrics, including
the use of GHGs, that should be considered most relevant for
reporting purposes to investors. The SEC had asked companies
whether they should report Scope 1 or direct GHG emissions that are
released as result of manufacturing a product, be it power or
plastic; Scope 2 GHGs that are indirectly released through purchase
of carbon-intensive power, heat or cooling to manufacture said
product; or Scope 3 emissions that are released across the value
chain and include consumption of the product.
Gensler also has asked the agency staff to consider the ways
that funds are marketing themselves to investors as sustainable,
green, and "ESG" or Environment, Social, and Governance, and what
factors undergird those claims.
Good starting point
As Gensler pointed out in his remarks, most commenters favor a
reporting regime that follows the framework outlined by the Task
Force for Climate-Related Disclosures (TCFD) and an
industry-specific approach included in the climate-related portions
of guidelines from the Sustainability Accounting Standards Board
(SASB). BPI agreed with other institutional investors that these
two approaches should serve as "a good starting point," but added
that not all their recommendations are appropriate for the US.
For instance, the TCFD recommended companies should report on
climate risks in their public annual financial filings. BPI Senior
Vice President Lauren Anderson, however, advised the SEC against
this recommendation, citing "potential liability."
Climate disclosures, she wrote, possess certain features that
merit an additional safe harbor beyond those offered under current
law against SEC investigations and actions for forward-looking
statements.
Safe harbor
Instead, Anderson said, a safe harbor specifically for climate
disclosures is appropriate because it is difficult to measure
climate risks, which may change over time and prove incorrect.
Currently, the Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements from private
litigants, but not against SEC enforcement and investigation.
Beyond forward-looking statements, BPI also recommended the SEC
should limit liability for "point-in-time climate disclosures" or
time-stamped disclosures that are based on information from third
parties that banks can neither control nor verify.
And it said the SEC should consider climate risk reporting in a
separate document, a Climate Disclosure (CD) form, similar to the
one it requires for conflict minerals. This form is separate from
the annual 10K report, or the annual financial report that publicly
traded companies file with the SEC.
The BPI also advised the SEC against requiring any additional
climate reporting requirements to be subject to an audit or
assurance process, terming it "an unduly burdensome requirement
given how costly and time-consuming climate assurance is at this
time."
If the liability regime is not carefully constructed by the SEC,
the risk of private sector litigation as well as the risk of SEC
investigation would have the consequence of discouraging companies
registered with the agency from making "fulsome disclosures" to
investors, Anderson wrote.
BPI stance has support
The BPI is not alone in taking this stance.
Unlike Gensler, SEC Commissioner Elad Roisman has not shied away
from supporting the idea of a safe harbor against climate
disclosures if they are earnestly trying to report this
information.
"I worry that if we were to add a slew of new disclosure
requirements—especially requirements that are not based on a
materiality standard—we would expose companies (and their
investors), boards, and management to numerous costly lawsuits when
they are merely trying to provide information to satisfy a
regulatory requirement," Roisman said at a 3 June ESG Forum.
Furnish, not file
Deutsche Bank also agrees with BPI's suggestion for a safe
harbor against "unintentionally misleading amounts or
statements."
Such an assurance would encourage companies to be candid in
their reporting rather than submitting boiler-plate disclosures,
Erik Soderberg, head of Deutsche Bank-Americas, said.
Also on board is global chemicals company Dow, which echoed BPI
in stating it prefers to "furnish" climate disclosures rather than
be required to file reports because it would protect companies from
"strict liability standards." (Dow released on 24 June what it
called its "first consolidated ESG report.)
IHS Markit CleanTech Executive Director Peter Gardett said
financial firms are seeking an additional layer of protection
against liability by seeking to "furnish" dedicated climate reports
rather than filing them, as they can be requested during the
"discovery" process of a legal proceeding.
"Avoiding an avalanche of litigation just as companies try to
quantify and explain their climate risk is important for investors
as well as for the firms themselves," Gardett told Net-Zero
Business Daily 29 June.
In a 13 June letter, the World Economic Forum (WEF) on behalf of
eight corporate partners—Banco Bilbao Vizcaya Argentaria, Bank
of America, Dell Technologies, Henry Schein, PayPal Holdings,
S&P Global, SAP, and Telefonanktiebolaget LM Ericsson—also
asked the SEC to create a safe harbor for forward-looking
statements, especially on reports based on third-party data.
S&P Global is in the process of closing its merger with IHS
Markit, which owns Net-Zero Business Daily.
Audited disclosures
Not all banks support BPI's stance on climate disclosures. The
Amalgamated Bank, a wholly owned subsidiary of Amalgamated
Financial Corp. that has roughly $6 billion in assets, told the SEC
it supports "audited, tabular disclosures" of a company's estimated
GHG releases that include both direct and indirect emissions, in
line with the standardized approach developed by the Partnership
for Carbon Accounting Financials, a collaboration of 118 financial
institutions with assets exceeding $38 trillion.
Backing Amalgamated Bank's position was Norges Bank Investment
Management (NBIM), the investment management arm of the Norwegian
central bank that has $399.5 billion invested in listed equities
and $139.9 billion in fixed income in the US.
In its 13 June comment letter, NBIM said the SEC ought to
require US companies to follow climate disclosures in line with
those recommended by TCFD framework so that they include
information for investors on their governance, strategy, risk
management, and their emissions targets.
In 2020, for instance, NBIM said only 11% of US companies were
following the TCFD recommendations.
Where NBIM and BPI agreed was that the SEC—in writing its
rule—could follow TCFD's logic and use industry-specific
standards laid out by the SASB to require companies to report
material risks as part of their regular financial disclosures, and
non-material risks through other channels.
There is no question among those commenters that the SEC needs
to implement climate disclosure rules, given the rapid pace of
climate and ESG-related investments, and the patchwork of reporting
regimes in place.
Mandatory reporting is critical because "the fragmented
disclosure framework currently in place, whereby investors must
negotiate with individual issuers to obtain certain material ESG
information, hinders the ability of our members, and their
investment managers, to effectively compare risks and opportunities
across issuers," concluded the Church Alliance, which represents
the CEOs of 38 church pension programs.
Posted 29 June 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst